Eliot Thomas, Manager of Tax Advisors at Anderson Business Advisors, shares expert insights on minimizing capital gains tax on stocks and the distinctions between bonus depreciation and Section 179. He discusses the benefits of employing your children in real estate ventures and how to manage health expenses through HSAs. Eliot also addresses educational expense deductions and strategic business structures to maximize tax advantages. Get ready for a lively conversation packed with practical financial strategies!
Understanding the differences between bonus depreciation and Section 179 is crucial for optimizing tax strategies in real estate investments.
Education expenses for an LLC in real estate are generally not deductible unless structured under a C corporation, making proper planning essential.
Employing family members like children in a business can promote tax efficiency, as compensation becomes tax-deductible and provides income to family members.
Deep dives
Understanding Bonus vs. Section 179 Depreciation
Bonus depreciation and Section 179 depreciation have distinct differences that can impact tax strategies. For 2023, bonus depreciation is set to decrease from 100% to 80%, while Section 179 allows for a full deduction as long as the item being depreciated is below the indexed limit. Section 179 cannot create a loss, meaning it is a more conservative tax benefit, primarily benefiting short-term investments in tangible assets. In contrast, bonus depreciation can help create losses that can offset other income, thus becoming a more aggressive option for businesses looking to reduce taxable income more significantly.
Tax Deductions for LLCs in Real Estate Investing
When setting up an LLC for real estate investing, individuals often wonder about the deductibility of education expenses and equipment purchased prior to acquiring properties. Generally, education expenses linked to a new business line cannot be deducted unless structured under a C corporation. However, equipment purchases are typically more straightforward, provided the items are reasonable and necessary for business operations. It's important to consult a tax professional to ensure that the business structure aligns with the intended deductions and future business activities.
Paying Family Members: Payroll Guidelines
Employing family members, such as a child managing real estate properties, can provide a tax-efficient way to manage income and expenses. Parents can run payroll for their children, observing that the compensation must be reasonable and based on the services rendered. For example, an 18-year-old could potentially earn $2,000 a month if the work aligns with that pay scale in the market. This strategy not only provides a legitimate income to the child but also allows the parents to make tax-deductible payments, thus reducing their overall tax liability.
Utilizing HSAs for Health Insurance Premiums
Health Savings Accounts (HSAs) provide a beneficial way to manage healthcare expenses, including premiums, for individuals with high-deductible health plans. Contributions to an HSA are tax-deductible, and funds grow tax-free, allowing withdrawals for qualified medical expenses without incurring taxes. While certain limitations apply regarding the type of premiums covered, HSAs are considered a triple tax advantage solution—especially valuable for individuals anticipating high medical costs. Utilizing HSAs allows for long-term savings while reducing taxable income year over year.
DST Investments: Key Considerations and Benefits
Delaware Statutory Trusts (DSTs) provide a unique option for deferring taxes on capital gains through 1031 exchanges, offering potential advantages in terms of new depreciation schedules on replaced properties. However, DSTs come with inherent risks, including low liquidity due to the nature of the investment. They can provide tax benefits but require careful consideration of the property types they hold and the duration of the investment. Investors should weigh the benefits of a potential upREIT, which allows for greater diversification and easier exit strategies, against the complexities of a DST structure.
In this episode, host Toby Mathis, Esq., welcomes regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to discuss several questions about taxation and S-Corps. Other topics include paying your children to work on your real estate properties, paying medical deductibles with your HSA, and of course minimizing capital gains taxes on stocks you’ve purchased. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
Is there any differences between bonus depreciation and 179 depreciation and, if yes, what are the differences? - They are completely different, though easily confused, and you can use them together.
if I set up my LLC for real estate investing but I have not bought anything yet, can I ride off the courses I have enrolled in to educate myself and equipment? - if it is true investing, then probably you wouldn't be able to deduct. There isn't any place in the tax returns to deduct something like that.
Can I run a payroll payroll for my son, who was 18 years old, to manage my real estate properties? What is the maximum amount that I can pay him to support me in my business? - There isn't necessarily any limit. It's just that, whatever you have to be reasonable for the services that the child is providing.
Can you pay the high deductible health insurance premiums from the HSA? - you can pay ANY deductible out of an HSA.
I'm a Big Dog and I have lots of questions about forming my LLC for a fix and split business and how to effectively write off expenses for 2023. I haven't set up my LLC yet and I'm in the middle of rehabbing a house that we won't be able to put on the market until next year. Is it too late to set up the LLC and get those write offs for this year? Does it matter if I'm not making any money yet? Should my LLC be filed as an escort? But I would have to be earning income and paying myself something, right? Can you explain how it all works? - So lawsuits are all over a place when you're rehabbing. So get that set up. All your costs that you're incurring are inventory, which means we don't get it deduct anything until a year you sell it.
What are the benefits of taxing my beauty salon as an S-corp? -you can write off like the percentage of the use of the home under many different theories. You could be using net square footage, you could be using the room methodology, you could be using gross square, or whatever is your best interest.
Can you roll over money from a current 401k account into a solo 401k account to invest in real estate? Can you please explain the taxes I would be responsible for paying on any gains made on a real estate investment using money in a solo 401k? - typically you can’t move it if you’re still employed. There aren’t any taxes.
what is the tax way to invest in the stock market and protect capital gains to minimize them? - we like to set up a partnership, put the trading into the partnership, and that partnership will be composed of a portion that goes to the individual, maybe 80, 90%, the rest to a C corporation.
I own rental properties and manage them myself Currently. I don't need the income right now. That's a great situation to be in. What are some strategies to get that income into a retiring account such as a solo 401k, since it's not earned income? - if it's a rental, you're going to want to hit in your 1040, which means it's probably a partnership.
I am looking for tax treatment benefit of a DST Stands for Delaware statutory trust, not a deferred sales trust, delaware statutory trust. It would be done through a 1031 exchange, so I understand that part, but it sounds like not only would I get a new depreciation schedule, but I get more. Granted, I should get more just due to the new asset purchase price. Right, what are the flags for a DST investment? - What are red flags? I think the things we always talked about is - it's just not very liquid when you have that Delaware statutory trust.
